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Wednesday, August 25, 2010

Time to buy the following ETF options

This is what I did to diversify my ETF option portfolio in a single trading day to limit risk. Let's say when after analysis you came to the conclusion a trend may be forming in a certain sector you can buy or sell different investment vehicles that are somewhat correlated with each other, I usually do this within the same day.
The Dow slipped below 10k today, crawling back up closing at 10,060. The index has lost a lot of points over the last few days as a result of missed estimates, probably the biggest one being the housing market. Despite all the negative news it managed to maintain a close slightly above the 10k mark. To me, this is an indication the DJIA is trading around psychological levels. In fact, given all the doom and gloom out there at the moment I was quite surprised about the 'minimal' losses the index endured signaling an uptrend soon.
As I am talking about this index it makes sense to focus on an ETF that tracks this index (DIA) and ETFs that correlate with it. My picks are; DIA, SPY (S&P 500), QQQQ (NASDAQ) and the FXE, and their associated option contracts. All of these are Calls, even the FXE (tracks the Euro) that has the tendency to move upwards when the Dow moves in that direction too.

Take a look at the chart below;

From that, I bought the call option DIA1018I100 which mean it will expire September 18, for the purchase price of $2.34, trading around the close at $2.60.
The same goes for:

SPY1018I109 @ $0.86, now @ $1.05

QQQQ1018I44 @ $0.94, now @ $1.13

FXE1018I126 @ 1.60, now @ 1.53

As you can see, I'm losing a bit of money on the FXE option, but that's not as big of a deal since I made a profit on all the others. Besides, I still have until the 18th of September to decide whether I want to sell the option or let it expire. I usually hold on to these unless something drastic happens, which is not often the case.
There are tons of other ETFs out there that are somewhat correlated with each other. Like Gold and Silver, or Oil and the USD Index. If one investment goes up, the other might veer off the path a bit, but it's not like you put all your eggs in one basket, and if you're right, all your investments will go up!

Disclaimer:

All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.